SALES 2SR
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX
APPEALS and ATENEO DE MANILA
UNIVERSITY, respondents.
PANGANIBAN, J.:
In conducting researches and studies of social organizations
and cultural values thru its Institute of Philippine Culture, is
the Ateneo de Manila University performing the work of an
independent contractor and thus taxable within the purview
of then Section 205 of the National Internal Revenue Code
levying a three percent contractor's tax? This question is
answer by the Court in the negative as it resolves this petition
assailing the Decision 1 of the Respondent Court of
Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27,
1994 affirming that of the Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are
reproduced hereinbelow, the same being largely undisputed
by the parties.
Private respondent is a non-stock, non-profit educational
institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of
Philippine Culture (IPC), which has no legal personality
separate and distinct from that of private respondent. The IPC
is a Philippine unit engaged in social science studies of
Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international
organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner
Commissioner of Internal Revenue a demand letter dated
June 3, 1983, assessing private respondent the sum of
P174,043.97 for alleged deficiency contractor's tax, and an
assessment dated June 27, 1983 in the sum of P1,141,837 for
alleged deficiency income tax, both for the fiscal year ended
March 31, 1978. Denying said tax liabilities, private
respondent sent petitioner a letter-protest and subsequently
filed with the latter a memorandum contesting the validity of
the assessments.
On March 17, 1988, petitioner rendered a letter-decision
canceling the assessment for deficiency income tax but
modifying the assessment for deficiency contractor's tax by
increasing the amount due to P193,475.55. Unsatisfied,
private respondent requested for a reconsideration or
reinvestigation of the modified assessment. At the same time,
it filed in the respondent court a petition for review of the said
letter-decision of the petitioner. While the petition was
pending before the respondent court, petitioner issued a final
decision dated August 3, 1988 reducing the assessment for
deficiency contractor's tax from P193,475.55 to P46,516.41,
exclusive of surcharge and interest.
On July 12, 1993, the respondent court rendered the
questioned decision which dispositively reads:
WHEREFORE, in view of the foregoing, respondent's decision
is SET ASIDE. The deficiency contractor's tax assessment in
the amount of P46,516.41 exclusive of surcharge and interest
for the fiscal year ended March 31, 1978 is hereby CANCELED.
No pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this
Court via the present petition for review raising the following
issues:
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS
UNDER THE PURVIEW OF INDEPENDENT CONTRACTOR
PURSUANT TO SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS
SUBJECT TO 3% CONTRACTOR'S TAX UNDER SECTION
205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal
Revenue Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards,
and others. — A contractor's tax of threeper centum of the
gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors
except persons, associations and corporations under contract
for embroidery and apparel for export, as well as their agents
and contractors and except gross receipts of or from a pioneer
industry registered with the Board of Investments under
Republic Act No. 5186:
xxx xxx xxx
The term "independent contractors" include persons
(juridical or natural) not enumerated above (but not including
individuals subject to the occupation tax under Section 12 of
the Local Tax Code) whose activity consists essentially of the
sale of all kinds of services for a fee regardless of whether or
not the performance of the service calls for the exercise or use
of the physical or mental faculties of such contractors or their
employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in holding
that private respondent is not an "independent contractor"
within the purview of Section 205 of the Tax Code. To
petitioner, the term "independent contractor", as defined by
the Code, encompasses all kinds of services rendered for a fee
and that the only exceptions are the following:
a. Persons, association and corporations under contract for
embroidery and apparel for export and gross receipts of or
from pioneer industry registered with the Board of
Investment under R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the Local Tax
Code (under the old Section 182 [b] of the Tax Code); and
c. Regional or area headquarters established in the
Philippines by multinational corporations, including their
alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communication and coordinating centers for
their affiliates, subsidiaries or branches in the Asia Pacific
Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls
under the definition of an "independent contractor" and is not
among the aforementioned exceptions, private respondent is
therefore subject to the 3% contractor's tax imposed under the
same Code. 4
The Court of Appeals disagreed with the Petitioner
Commissioner of Internal Revenue and affirmed the assailed
decision of the Court of Tax Appeals. Unfazed, petitioner now
asks us to reverse the CA through this petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the purview
of independent contractor pursuant to Section 205 of the Tax
Code.

2) Whether or not private respondent is subject to 3%
contractor's tax under Section 205 of the Tax Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de
Manila University, through its auxiliary unit or branch — the
Institute of Philippine Culture — performing the work of an
independent contractor and, thus, subject to the three percent
contractor's tax levied by then Section 205 of the National
Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal
Revenue Code germane to the case before us read:
Sec. 205. Contractors, proprietors or operators of dockyards,
and others. — A contractor's tax of threeper centum of the
gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors,
except persons, associations and corporations under contract
for embroidery and apparel for export, as well as their agents
and contractors, and except gross receipts of or from a pioneer
industry registered with the Board of Investments under the
provisions of Republic Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons
(juridical or natural) not enumerated above (but not including
individuals subject to the occupation tax under Section 12 of
the Local Tax Code) whose activity consists essentially of the
sale of all kinds of services for a fee regardless of whether or
not the performance of the service calls for the exercise or use
of the physical or mental faculties of such contractors or their
employees.
The term "independent contractor" shall not include regional
or area headquarters established in the Philippines by
multinational corporations, including their alien executives,
and which headquarters do not earn or derive income from
the Philippines and which act as supervisory, communications
and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.
SALES 2SR
The term "gross receipts" means all amounts received by the strictly construed against the taxpayer — come into play,
prime or principal contractor as the total contract price, contrary to petitioner's position. This is the main line of
undiminished by amount paid to the subcontractor, shall be reasoning of the Court of Tax Appeals in its decision, 10 which
excluded from the taxable gross receipts of the subcontractor. was affirmed by the CA.
Petitioner Commissioner of Internal Revenue contends that The Ateneo de Manila University Did Not Contract
Private Respondent Ateneo de Manila University "falls within for the Sale of the Service of its Institute of
the definition" of an independent contractor and "is not one Philippine Culture
of those mentioned as excepted"; hence, it is properly a subject
of the three percent contractor's tax levied by the foregoing
After reviewing the records of this case, we find no evidence
provision of law. 6 Petitioner states that the "term
that Ateneo's Institute of Philippine Culture ever sold its
'independent contractor' is not specifically defined so as to
services for a fee to anyone or was ever engaged in a business
delimit the scope thereof, so much so that any person who . . .
apart from and independently of the academic purposes of the
renders physical and mental service for a fee, is now
university.
indubitably considered an independent contractor liable to
3% contractor's tax." 7 According to petitioner, Ateneo has the
burden of proof to show its exemption from the coverage of Stressing that "it is not the Ateneo de Manila University per
the law. se which is being taxed," Petitioner Commissioner of Internal
Revenue contends that "the tax is due on its activity of
conducting researches for a fee. The tax is due on the gross
We disagree. Petitioner Commissioner of Internal Revenue
receipts made in favor of IPC pursuant to the contracts the
erred in applying the principles of tax exemption without first
latter entered to conduct researches for the benefit primarily
applying the well-settled doctrine of strict interpretation in
of its clients. The tax is imposed on the exercise of a taxable
the imposition of taxes. It is obviously both illogical and
activity. . . . [T]he sale of services of private respondent is
impractical to determine who are exempted without first
made under a contract and the various contracts entered into
determining who are covered by the aforesaid provision. The
between private respondent and its clients are almost of the
Commissioner should have determined first if private
same terms, showing, among others, the compensation and
respondent was covered by Section 205, applying the rule of
terms of payment." 11(Emphasis supplied.)
strict interpretation of laws imposing taxes and other burdens
on the populace, before asking Ateneo to prove its exemption
therefrom. The Court takes this occasion to reiterate the In theory, the Commissioner of Internal Revenue may be
hornbook doctrine in the interpretation of tax laws that "(a) correct. However, the records do not show that Ateneo's IPC
statute will not be construed as imposing a tax unless it does in fact contracted to sell its research services for a fee. Clearly
so clearly, expressly, and unambiguously . . . (A) tax cannot then, as found by the Court of Appeals and the Court of Tax
be imposed without clear and express words for that purpose. Appeals, petitioner's theory is inapplicable to the established
Accordingly, the general rule of requiring adherence to the factual milieu obtaining in the instant case.
letter in construing statutes applies with peculiar strictness
to tax lawsand the provisions of a taxing act are not to
be extended by implication." 8 Parenthetically, in answering In the first place, the petitioner has presented no evidence to
the question of who is subject to tax statutes, it is basic that prove its bare contention that, indeed, contracts for sale of
services were ever entered into by the private respondent. As
"in case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects appropriately pointed out by the latter:
or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and An examination of the Commissioner's Written Formal Offer
clearly import." 9 of Evidence in the Court of Tax Appeals shows that only the
following documentary evidence was presented:
To fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be Exhibit 1 BIR letter of authority no. 331844
engaged in the business of selling its services. Hence, to
impose the three percent contractor's tax on Ateneo's Institute
of Philippine Culture, it should be sufficiently proven that the 2 Examiner's Field Audit Report
private respondent is indeed selling its services for a fee in
pursuit of an independent business. And it is only after private 3 Adjustments to Sales/Receipts
respondent has been found clearly to be subject to the
provisions of Sec. 205 that the question of exemption
therefrom would arise. Only after such coverage is shown does 4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.
the rule of construction — that tax exemptions are to be

None of the foregoing evidence even comes close to purport to
be contracts between private respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly
declared that the " funds received by the Ateneo de Manila
University are technically not a fee. They may however fall as
gifts or donations which are tax-exempt" as shown by private
respondent's compliance with the requirement of Section 123
of the National Internal Revenue Code providing for the
exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the
Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition
of an "independent contractor".
For one, the established facts show that IPC, as a unit of the
private respondent, is not engaged in business. Undisputedly,
private respondent is mandated by law to undertake research
activities to maintain its university status. In fact, the research
activities being carried out by the IPC is focused not on
business or profit but on social sciences studies of Philippine
society and culture. Since it can only finance a limited
number of IPC's research projects, private respondent
occasionally accepts sponsorship for unfunded IPC research
projects from international organizations, private
foundations and governmental agencies. However, such
sponsorships are subject to private respondent's terms and
conditions, among which are, that the research is confined to
topics consistent with the private respondent's academic
agenda; that no proprietary or commercial purpose
research is done; and that private respondent retains not
only the absolute right to publish but also the ownership of
the results of the research conducted by the IPC. Quite
clearly, the aforementioned terms and conditions belie the
allegation that private respondent is a contractor or is
engaged in business.
For another, it bears stressing that private respondent is a
non-stock, non-profit educational corporation. The fact that it
accepted sponsorship for IPC's unfunded projects is merely
incidental. For, the main function of the IPC is to undertake
research projects under the academic agenda of the private
respondent. Moreover the records do not show that in
accepting sponsorship of research work, IPC realized profits
from such work. On the contrary, the evidence shows that for
about 30 years, IPC had continuously operated at a loss, which
means that sponsored funds are less than actual expenses for
its research projects. That IPC has been operating at a loss
loudly bespeaks of the fact that education and not profit is the
motive for undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the
sponsored research projects, the fact still remains that there is
no proof that part of such earnings or profits was ever
distributed as dividends to any stockholder, as in fact none
was so distributed because they accrued to the benefit of the
private respondent which is a non-profit educational
institution. 14
Therefore, it is clear that the funds received by Ateneo's
Institute of Philippine Culture are not given in the concept of
a fee or price in exchange for the performance of a service or
delivery of an object. Rather, the amounts are in the nature of
an endowment or donation given by IPC's benefactors solely
for the purpose of sponsoring or funding the research with no
strings attached. As found by the two courts below, such
sponsorships are subject to IPC's terms and conditions. No
proprietary or commercial research is done, and IPC retains
the ownership of the results of the research, including the
absolute right to publish the same. The copyrights over the
results of the research are owned by
Ateneo and, consequently, no portion thereof may be
reproduced without its permission. 15 The amounts given to
IPC, therefore, may not be deemed, it bears stressing as fees
or gross receipts that can be subjected to the three percent
contractor's tax.
It is also well to stress that the questioned transactions of
Ateneo's Institute of Philippine Culture cannot be deemed
either as a contract of sale or a contract of a piece of work. "By
the contract of sale, one of the contracting parties obligates
himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price
certain in money or its equivalent." 16 By its very nature, a
contract of sale requires a transfer of ownership. Thus, Article
1458 of the Civil Code "expressly makes the obligation to
transfer ownership as an essential element of the contract of
sale, following modern codes, such as the German and the
Swiss. Even in the absence of this express requirement,
however, most writers, including Sanchez Roman, Gayoso,
Valverde, Ruggiero, Colin and Capitant, have considered such
transfer of ownership as the primary purpose of sale. Perez
and Alguer follow the same view, stating that the delivery of
the thing does not mean a mere physical transfer, but is a
means of transmitting ownership. Transfer of title or an
agreement to transfer it for a price paid or promised to be paid
is the essence of sale." 17 In the case of a contract for a piece of
work, "the contractor binds himself to execute a piece of work
for the employer, in consideration of a certain price or
compensation. . . . If the contractor agrees to produce the work
from materials furnished by him, he shall deliver the thing
produced to the employer and transfer dominion over the
thing, . . ." 18 Ineludably, whether the contract be one of sale or
one for a piece of work, a transfer of ownership is involved and
a party necessarily walks away with an object. 19 In the case at
bench, it is clear from the evidence on record that there was
no sale either of objects or services because, as adverted to
earlier, there was no transfer of ownership over the research
SALES 2SR
data obtained or the results of research projects undertaken
by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the
Institute of Philippine Culture is done in pursuance of
maintaining Ateneo's university status and not in the course
of an independent business of selling such research with profit
in mind. This is clear from a reading of the regulations
governing universities:
31. In addition to the legal requisites an institution must meet,
among others, the following requirements before an
application for university status shall be considered:
xxx xxx xxx
(e) The institution must undertake research and operate with
a competent qualified staff at least three graduate
departments in accordance with the rules and standards for
graduate education. One of the departments shall be science
and technology. The competence of the staff shall be judged
by their effective teaching, scholarly publications and
research activities published in its school journal as well as
their leadership activities in the profession.
(f) The institution must show evidence of adequate and stable
financial resources and support, a reasonable portion of
which should be devoted to institutional development and
research. (emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due notice and
hearing, for failure to maintain satisfactorily the standards
and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine
Culture that is being taxed and not the Ateneo is patently
erroneous because the former is not an independent juridical
entity that is separate and distinct form the latter.
Factual Findings and Conclusions of the Court of
Tax Appeals Affirmed by the Court of Appeals
Generally Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a
highly specialized body specifically created for the purpose of
reviewing tax cases. Through its expertise, it is undeniably
competent to determine the issue of whether" 21 Ateneo de
Manila University may be deemed a subject of the three
percent contractor's tax "through the evidence presented
before it." Consequently, "as a matter of principle, this Court

will not set aside the conclusion reached by . . . the Court of
Tax Appeals which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident
exercise of authority . . ." 22 This point becomes more evident
in the case before us where the findings and conclusions of
both the Court of Tax Appeals and the Court of Appeals appear
untainted by any abuse of authority, much less grave abuse of
discretion. Thus, we find the decision of the latter affirming
that of the former free from any palpable error.
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For the institute to have tenaciously continued operating for
so long despite its accumulation of significant losses, we can
only agree with both the Court of Tax Appeals and the Court
of Appeals that "education and not profit is [IPC's] motive for
undertaking the research
projects." 25
WHEREFORE, premises considered, the petition is DENIED
and the assailed Decision of the Court of Appeals is hereby
AFFIRMED in full.

SO ORDERED.
Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture

conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and
disbursements for the period 1972 to 1985. 23 In fact, it was
Ateneo de Manila University itself that had funded the
research projects of the institute, and it was only when Ateneo
could no longer produce the needed funds that the institute
sought funding from outside. The testimony of Ateneo's
Director for Accounting Services, Ms. Leonor Wijangco,
provides significant insight on the academic and nonprofit
nature of the institute's research activities done in furtherance
of the university's purposes, as follows:

Q Now it was testified to earlier by Miss

Thelma Padero (Office Manager of the
Institute of Philippine Culture) that as far
as grants from sponsored research it is
possible that the grant sometimes is less
than the actual cost. Will you please tell
us in this case when the actual cost is a lot
less than the grant who shoulders the
additional cost?

A The University.

Q Now, why is this done by the

University?

A Because of our faculty development

program as a university, because a
university has to have its own research
institute. 24

So, why is it that Ateneo continues to operate and conduct

researches through its Institute of Philippine Culture when it
undisputedly loses not an insignificant amount in the process?
The plain and simple answer is that private respondent is not
a contractor selling its services for a fee but an academic
institution conducting these researches pursuant to its
commitments to education and, ultimately, to public service.